If you just clicked through your email about this morning’s blogs, this isn’t the blog you were expecting – and it’s not the one I originally wrote, because developments on the CTA front are breaking fast and furious. On Monday, the 5th Circuit granted the DOJ’s request for a stay of a district court decision preliminarily enjoining enforcement of the Corporate Transparency Act on constitutional grounds. But that stay has now been vacated by a new 5th Circuit merits panel. Here’s a Bloomberg Tax article on the latest decision.
In response to the original 5th Circuit ruling granting the stay, FinCEN announced a brief extension of the January 1, 2025 filing deadline to January 13, 2025. FinCEN hasn’t yet posted anything in response to the latest ruling vacating the stay. Isn’t this fun? We’re posting law firm memos on the evolving drama in our “Beneficial Ownership” Practice Area.
I recently came across a new study on classified boards, and I thought the results were a little surprising. Although these structures are more common among younger companies, it turns out that they remain fairly prevalent throughout corporate America. Here’s an excerpt from a CLS Blue Sky Blog post by the authors of the study:
The conventional belief suggests that classified boards are disappearing from corporate America, particularly among well-established firms in the S&P 1500 Index. However, more recent findings indicate that young firms are increasingly likely to go public with a classified board and that, while the costs of having a classified board become significantly higher as firms mature, firms rarely opt to declassify their boards. We expand on these findings by examining a more comprehensive sample of firms over an extended period, uncovering new evidence of how and why the use of classified boards has evolved and its implications for shareholder value.
The study found that the prevalence of classified boards among S&P 1500 companies declined from 58% in the early 1990s to 31% in 2020, while the prevalence of classified boards outside the S&P 1500 rose from 42% to 52% over the same period. The study also found that as companies mature, they increasingly discard the classified board structure.
That wasn’t always the case. In the 1990s, the use of classified boards declined only slightly as firms matured, but that began to change during the first decade of this century, with the usage of staggered boards declining from 65% of the youngest firms to 46% among the most mature. That trend accelerated between 2011-2020 – while 73% of newly public companies had classified boards, only 33% of mature firms retained them.
This recent Ideagen/Audit Analytics blog notes that although lengthy auditor tenure is an area of concern among governance advocates, two dozen public companies have had the same auditor for more than a century! So which audit firms have managed to hold on to their audit clients for more than 100 years? This excerpt provides the answer:
PricewaterhouseCoopers (PwC), Deloitte and Ernst & Young (EY) are the only members of the US centenarian club. PwC audited eight of these companies, Deloitte audited six and EY was the auditor of record for the remaining 10 companies. The longest audit tenure on record was BCE Inc.’s (formerly known as Bell Canada Enterprises, Inc.) relationship with Deloitte, which has spanned 144 years.
The blog lists each of the US public companies that has retained the same auditor for over 100 years and discloses the name of that auditor. It also points out that the number of public companies that have had the same auditor for more than a century has doubled since 2016.
It’s long been an open secret that many Reg D issuers opt not to file a Form D for their offerings. One reason may be that the SEC hasn’t made non-compliance with Form D filing requirements an enforcement priority. That changed on Friday, when the SEC announced settled enforcement proceedings against three issuers that failed to make required Form D filings. This excerpt from the SEC’s press release explains the agency’s rationale for the actions:
An issuer’s failure to follow the requirements to file a Form D (or amend its existing Form D filing) impedes the Commission’s ability to fully assess the scope of the Regulation D market, which is key to the Commission’s understanding of whether Regulation D is appropriately balancing the need for investor protection on one hand and the furtherance of capital formation on the other, particularly as it relates to small businesses.
It also harms the Commission’s ability to monitor and enforce compliance with the requirements of Regulation D and the ability of state securities regulators and self-regulatory organizations to monitor and enforce other securities laws and rules. In addition, it hampers the ability of investors and other market participants to understand whether companies are complying with federal securities laws in their offerings, to research and analyze the Regulation D market, and to report on capital-raising in industries that use Regulation D.
Each of the issuers agreed to cease and desist from failing to comply with Rule 503 of Regulation D and agreed to pay civil penalties ranging from $60,000 to $195,000. In addition, the order in each of these actions points out that the offerings at issue involved general solicitation, which made the statutory Section 4(a)(2) exemption unavailable. (Keith Bishop has posted some thoughts on this topic over on his blog).
If the SEC’s goal is improved compliance with Rule 503’s filing requirement, then I think that in addition to “message cases” like these, the SEC should take a hard look at the information that it asks issuers to provide in a Form D. There’s a lot of stuff in there only a bureaucrat could love, and most issuers regard Form D as the Securities Act’s version of a “TPS Report.” But the bottom line is that if you don’t file a Form D, you’re not complying with the law, and you aren’t going to get a lot of sympathy from the Division of Enforcement.
One thing I’m not sure about is whether the cease-and-desist orders in these cases are regarded as an “order, judgment, or decree of any court of competent jurisdiction. . . enjoining such person for failure to comply with Rule 503. . . ” If so, the issuers also would be prohibited under Rule 507 from relying on Reg D absent a waiver from the SEC. My gut tells me that they are, but I’d think that’s something the SEC might highlight in its press release, which it didn’t do. If any SEC enforcement lawyers out there can enlighten me, I’d appreciate it – and I’ll update the blog.
On Friday, the SEC announced that EDGAR will be closed on Tuesday and Wednesday. The announcement noted that Christmas Eve is being treated as a federal holiday this year. Here’s the other relevant info from the SEC’s announcement:
Please be aware that on December 24, 2024 and December 25, 2024:
– EDGAR filing websites will not be operational.
– Filings will not be accepted in EDGAR.
– EDGAR Filer Support will be closed.
Filings required to be made on Tuesday, December 24 and Wednesday, December 25 will be considered timely if filed on December 26, 2024, EDGAR’s next operational business day.
This is our last blog before the holidays begin, and I know that this time of year makes a lot of people nostalgic, especially geriatrics like me. So, for my fellow boomers and our Gen X readers, here’s a link to a website featuring something that many of us remember fondly from our childhoods – decades of the Sears Holiday “Wishbook” and other holiday catalogues. Even if you’re not a boomer, I bet you’ll have fun visiting the National Toy Hall of Fame’s website. You’re sure to find at least a few of your childhood favorites here.
Merry Christmas and Happy Hanukkah to all those who celebrate! We’ll be back after the 25th, but blogging will be lighter than usual over the holidays.
This Skadden memo offers insights into emerging board governance practices aimed at providing appropriate oversight to corporate cybersecurity programs. This excerpt notes that boards are starting to look beyond the already heavily burdened audit committee when deciding who should take the lead for the board on cybersecurity oversight:
There is no one-size-fits-all approach. What is important is to be thoughtful about which body has the time available to assess these issues on an on-going basis and will be able to bring relevant expertise to the challenge. Responsibility could be given to the audit committee, since that body usually oversees controls of various sorts and general compliance with legal and regulatory requirements.
But, where cybersecurity issues are central to the business, some companies have created a technology committee rather than saddle the audit committee with additional work, since it typically already has a lot on its plate. Such a technology committee is usually dedicated to overseeing the strategy, performance and compliance of all the company’s technology, positioning this committee well to make cybersecurity governance decisions and address newly emerging challenges associated with other technology issues such as artificial intelligence deployment.
Other companies have a risk committee dedicated to identifying, assessing and mitigating risks, including cybersecurity risks, across the company. In short, there are many approaches to how a board may structure its cybersecurity oversight, yet it is ultimately the board’s responsibility to determine which structure or body would best serve the company.
The memo also provides an overview of directors’ oversight responsibilities and key considerations that boards should keep in mind when establishing governance structures to address cybersecurity concerns.
After I blogged about the SEC’s position on expenditures for executive security being regarded as a perk, a member reached out with an anecdote about an interesting – and troubling – real world scenario where this issue came up:
Some years ago, one of my former firm’s clients was a major defense contractor, and had been advised by the US Government that because of known threats, certain security-related items should be installed at the CEO’s residence. The SEC staff insisted that the costs needed to be disclosed as perquisites, to which we relented. One of our concerns was that because other senior executives did not have comparable security coverage, we were letting the bad guys know where the systemic vulnerabilities might be. This continues to be an issue. When it comes to matters of national security, I disagree with the staff position.
In light of the SEC’s position, companies thinking about implementing or upgrading security arrangements for their executives should consider whether casting a wider net may be necessary in order to avoid disclosure that inadvertently reveals – or creates – security vulnerabilities.
We’ve posted the transcript for our webcast “Surviving Say-On-Pay: A Roadmap for Winning the Vote in Challenging Situations” – full of practical tips for say-on-pay scenarios that companies frequently encounter – from D.F. King’s Zally Ahmadi, Compensia and CompensationStandards.com’s Mark Borges, Orrick’s JT Ho, Foot Locker’s Jenn Kraft, and Tesla’s Derek Windham. They covered the following topics:
You will definitely want to check this out as we enter the proxy season, and the transcript is a low-time-and-effort way help you think through any changes you want to make on how you approach your say-on-pay proposal in 2025.
Members of this site can access the transcript of this program. If you are not a member, email sales@ccrcorp.com to sign up today and get access to the full transcript – or sign up online.
Yesterday, in Alliance for Fair Board Recruitment v. SEC, (5th Cir.; 12/24), the 5th Circuit held that the SEC exceeded its authority when it approved Nasdaq’s board diversity rule. The case was decided by a 9-8 vote, and the Court’s action overrules a 5th Circuit panel’s prior decision upholding the rule.
In reaching this decision, the 5th Circuit concluded that the SEC’s actions implicated the “major questions” doctrine and that absent a clear Congressional directive, the agency lacked the statutory authority to authorize Nasdaq’s rule. The SEC and Nasdaq argued, among other things, that because “full disclosure” was central to the Exchange Act, the SEC had broad authority to adopt a board diversity disclosure requirement. The Court disagreed, and this excerpt from the majority’s opinion indicates that it viewed the scope of the authority granted by the Exchange Act more narrowly:
SEC and Nasdaq contend that Supreme Court precedent establishes that full disclosure is the “core” purpose of the Exchange Act. . . But that is not true. What the Court has actually said is that the Act “embrace[s] a fundamental purpose . . . to substitute a philosophy of full disclosure for the philosophy of caveat emptor. and thus to achieve a high standard of business ethics in the securities industry.” Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 151 (1972) (emphasis added) (quotation omitted); compare post, at 45 (Higginson, J., dissenting).
In other words, the Court has acknowledged that disclosure is not an end in itself but rather serves other purposes, such as the purpose of promoting ethical behavior or “the purpose of avoiding frauds.” Ibid. Thus, nothing in the Court’s precedents undermines our conclusion that a disclosure rule is related to the purposes of the Act only if it is related to the elimination of fraud, speculation, or some other Exchange Act–related harm.
The Court ultimately concluded that the board diversity rule was “far removed” from the purposes of the Act. According to a Bloomberg Law article on the decision, Nasdaq doesn’t plan to appeal the ruling, while the SEC is “reviewing the decision and will determine next steps as appropriate.”
